Yet another aspect of Buffett engaging in financial shenanigans.  Instead of adhering to accepted SEC guidelines concerning marking down long term assets to their objective market values, Buffett’s Berkshire Hathaway decided to mark its assets to wishes, not unlike many of the zombie banks and firms such as Enron and others.

Accordingly, here are two articles by the irreverent Zero Hedge highlighting the progressively disturbing behavior of Berkshire Hathaway:

Berkshire Takes Accounting Rules Into Its Own Hands, Tells SEC To Stuff It

“A new just released stunner discloses the unprecedented level of hypocrisy attained by Warren Buffett, for whom apparently accounting rules are swell, except when he actually needs to follow them.”


Full Text Of Berkshire Letter Deciding To Override SEC Accounting Policies

"We eagerly await Ms. Becky Quick's reporting on this latest development.”

And, here is a link referencing an article by Michael Lewis titled “The Temptation of St. Warren.”

As one commenter stated, “Buffet was a crook as a youth; is he now being revealed as a crook at the end of his career, too?”

As Econgirl and many economists stress, correlation does not imply causation. 

Sure, our Dear and Loyal Readers might interpret our pontifications as harbingers of things to come and dutifully investigate further. Regardless, just because in March we highlighted more troubling signs concerning Moody’s Corporation (NYSE: MCO), doesn’t imply that said revelations caused the stock to plummet by 28%, from $30.23 (March 30) to $21.76 (May 11).  

We merely mentioned the behavior of savvy investors such as hedge fund manager David Einhorn at Greenlight Capital with respect to the investment attractiveness, or lack thereof, regarding MCO. Accordingly, the relationship between our revelations and the plummeting stock price is spurious at best.

Nevertheless, some investors got a wake-up call after reading MCO’s 10-Q filed May 7, or by reading more recent posts by Zero Hedge, published May 8 and May 11, and EconomicPolicyJournal.com that the SEC is investigating MCO.  Here is an extract from its 10-Q (bottom of page 20):


“On March 18, 2010, MIS received a ‘Wells Notice’ from the Staff of the SEC stating that the Staff is considering recommending that the Commission institute administrative and cease-and-desist proceedings against MIS…”


Why MCO waited nearly two months to share this material information while Buffett was dumping shares is worthy of another blog post. Incidentally, didn’t another of Buffett’s investees, Goldman Sachs, also delay revealing its own ‘Wells Notice’ and other material information?

The opinion at Coventry League and elsewhere is Moody’s may have difficulties as a going concern if the SEC enforces a cease-and-desist from being a ratings agency. In that case, some might want to paraphrase Friedrich Nietzsche: “Moody’s is Dead.”

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Note: MIS is an acronym for Moody’s Investors Service, a reportable segment of MCO.

In the past few years, investors and tax payers have been victims of securities fraud from WorldCom and Enron, to Bernie Madoff and the shenanigans of Allied Capital.  Nevertheless, citizens continue to pay taxes to fund government regulators such as the Securities and Exchange Commission (SEC) to help mitigate or prevent such fraud.  However, there has been a growing scrutiny by investors and citizens regarding the competency of the SEC.  The SEC counters that it needs more funds from citizens to be effective.

Well, in December 2008, ProPublica noted an investigative report revealing unacceptable behavior and predilections of viewing felonious pornography by several SEC staff, including senior officials earning annual salaries of $222k. The report and blog went virtually unnoticed until a few months ago when the Washington Times wrote about the SEC’s porn problem and more recently several bloggers and organizations including the Wall Street Journal, Huffington Post, TechCrunch, and Gawker provided further details of the SEC’s illicit behaviors.

Interest rate spikes, currency devaluations, too-big-to-fails, the SEC and investment theses.  These are just a few topics addressed by David Einhorn, co-founder of investment firm Greenlight Capital.

Remember Mr. Einhorn?  He is the manager who uncovered alleged fraud at companies such as Allied Capital and Lehman Brothers.  Before everyone and their brother realized these allegations were substantiated with clear and verifiable facts, the messenger was vilified.

Given this backdrop, what are some of Einhorn’s opinions and trades of recent? First, he is expecting a major currency collapse and a surge in interest rates in the next 3-5 years (see footnote below).  This is evidenced by his large allocation to gold and comments citing imprudent government deficits, among other examples.

Regarding the SEC, Einhorn is unyielding, opining in front of Congress about the SEC’s “crooked culture and lack of enforcement.”  Furthermore, he does not leave doubt regarding his thoughts about too-big-to-fail companies: “break them up.”  Edward Harrison, founder of the blog Credit Writedowns, summarizes these topics in an article at Seeking Alpha.

For practical investment insights, Einhorn rarely disappoints.  Recently he and other investors presented Vodafone Group (UK: VOD) as being undervalued (Jan 2010).

Einhorn’s thesis is based on Vodafone’s 45% stake in Verizon Wireless.  Essentially, the trade is considered a “5.5% Inflation Protected Bond with Free Non-Expiring Call Options.”  Market Folly summarizes the trade, including the slide below:

Lastly, it may be worth the effort to conduct due diligence on Moody’s (NYSE: MCO).  Buffett has been dumping shares, while Einhorn has been increasing his short position...

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Note: Einhorn’s interest rate thesis does not contradict our belief presented earlier this year regarding near-term deflation.

There is disagreement among economic observers regarding whether the economy is more likely to experience troubling inflation or deflation in the next couple of years.

Some who expect increased inflation reference current fiscal and monetary policies that, alone, are inflationary. Examples include recent government stimulus packages, historically low discount and federal funds rates, issuance of massive amounts of government and municipal debt, and expansion of the currency base, among other factors. Essentially, the more currency being created from nothing other than one’s good faith results in higher prices for goods and services (and a correspondingly lower value to said currency), ceteris paribus, to paraphrase my former economics professor. 

As is the case with most theories I’ve been taught while sitting in an ivory tower, ceteris paribus is noteworthy concerning whether theories are useful practically.

According to many who expect deflation, the rationale references value of assets and social psychology.  Regarding the former, we’ve experienced the effects of decoupling the price of an asset and its underlying secured cash value.  There are many thought experiments.  Think of houses: if everybody had to pay cash for a house, home prices would likely be a fraction of what they are today.  If municipalities could not issue bonds at reasonable interest rates or assess taxes beyond a moderate amount, then their cost structure (compensation, pensions, contracts) and prices would be lower.  These are just two of many examples, albeit presented in a simplistic manner.

What we have experienced in the past two years regarding some banks, companies and municipalities is that the price they paid for their assets exceeded the current and ongoing value of those assets: residential and commercial mortgages, stocks, credit default swaps, and tax receipt streams, for instance. 

As such, by printing more money and issuing more debt, inflation can be expected.  But, if debt of all kinds must be written down, some by 50% or even 100% (bankruptcy), then deflation is most likely to occur (prices of many goods and services decrease*).

So, the question to ask yourselves, Dear Loyal Readers, is “do you believe the current stated value of debt instruments and future obligations (on-and-off the balance sheets of companies and banks; derivatives; social security and pension funds; mortgages; credit card balances; sovereign and municipal bonds) accurately reflect reality?” 

If your answer is yes, then expect inflation.  Otherwise, expect near-term deflation.

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* In this scenario, falling prices are likely attributable to reduced spending and money supply contraction (e.g., reduced value of debt/liabilities more than offsets FED monetary expansion policies).

Reisman, Ph.D., George. "The Anatomy of Deflation." Ludwig Von Mises Institute. Mises Daily, 18 Aug. 2003. Web. <http://mises.org/daily/1298>. Reference for an expanded explanation of deflation.

Two reports about strategic M&A and private equity were released recently.  

Paul Weiss, a well-known corporate law firm, prepared a concise survey of the top 25 non-financial M&A transactions, highlighted at Research Recap here.  The report focuses on terms and characteristics.  However, a notable data-point is financial sponsors were nearly nonexistent (accounting for less than 3% of total value in the twelve-months ending July 2009).

The private equity summary was prepared by PitchBook, an independent private equity-focused research firm.  The report is updated quarterly and includes value, number, most active firms and sectors, among other criteria.

There were fewer and smaller transactions in comparison to peak 2006-2007 levels, with a reversion to activity during the last recession of 2001-2002.  For example, total number and value were down about 55% and 70%, respectively, from twelve-months ending June 2007 to same period of 2009.  Also, the median value for buyouts during 1H 2009 was $37 million, down from a 2007 high of $104 million.   

Still, private equity firms are originating and closing transactions, but some assert a competitive advantage has shifted to acquirers such as holding companies, strategic buyers, individual investor groups and fundless sponsors. 

The argument seems to reference smaller deal-sizes, less, if any, dependence on debt financing, longer-term investment horizons (some prefer to hold indefinitely), a focus on cultivating one or a few investments, and even a more personal approach with family-owned companies.

The implicit point to note about the ebb-and-flow of leveraged transaction volume is all that debt used to finance the record number of deals of yore (at premium valuations) comes due in the next 3-5 years. 

Ouch… 

For those interested in strategy, adapting to a changing environment, consumer behavioral trends, and, well, outright mismanagement, then analyzing the newspaper and print media industry provides a real-world, in-progress case study.

Although headlines of the death of the newspaper might be an exaggeration at the moment, there is clear and present danger.  The business model of newspapers depends on advertising revenue, which comprises about 80% of its total revenue.  In 2008, advertising revenue dropped 16.5%, according to the Newspaper Association of America.  Barclays Capital projects a 22.0% decline in advertising revenue in 2009 (see Mint.com below).  Startling, but also mirroring the economic recession.

Nonetheless, organizations that will most likely survive the economic challenges and thrive will create a new business model, with digital media being more prominent.  The extinction of the traditional daily is not likely in the near term, although it will probably play a more niche role.  Similar dynamics are occurring with telephones, internet connections, software, music and movies, to name a few.

Mint.com presents a concise one-page visual of key metrics of the top 25 U.S. newspapers.  Many others have written about the struggles of print media; Slate.com highlights the strategic and mismanagement aspects of this topic.

Well, that’s all for now, as I need to check my favorite news and entertainment blogs.